Cohen & Oalican Answer: Can a Life Estate Still Protect Your House from Medicaid Part 2

Part 2

The three year look back period was the most important reason to choose a Life Estate deed instead of an irrevocable trust to protect a client’s house. That benefit has been eliminated. Now clients and attorneys must consider the limitations of Life Estates in relation to irrevocable trusts. Most importantly, the Life Estate only works if the house is not sold until after the Medicaid recipient’s death. If the house is sold during the person’s life a portion (this value is based on Medicaid’s actuarial tables) of the proceeds will pass to the Medicaid recipient and the funds will be taken by Medicaid. If a house is held in an irrevocable trust, all of the proceeds from sale stay in the trust and remain protected regardless of when its sold. Although families understand the issue when they create the Life Estate, this becomes a pressing issue when the client moves into a nursing home and the house is empty. At that point, families must either rent the house (taking on the aggravation of being a landlord) or leave the house empty and use their own funds to pay for the property taxes and insurance. Both options are not ideal.

There are also capital gains tax issues to consider when choosing between a Life Estate deed and an irrevocable trust. The tax questions are somewhat up in the air right now and many attorneys believe that unless Congress changes the tax laws, Life Estate deeds will no longer give clients a step-up in the tax basis resulting in children paying capital gains taxes on all of the gain accrued during the parents’ lives.

That all being said, a Life Estate deed does have one important benefit. Its simple. A Life Estate
deed is easy to put in place. Its just a deed. Also, if everyone on the deed is agreeable, its also
easy to unwind; everyone just deeds the house back to the original owners. Reversing an irrevocable trust is much more complicated (and sometimes not possible) with an irrevocable trust.

Everyone wants to protect their home. The question remains what is the best strategy to do the job. In weighing your options, consider, how much control you want to keep, when the house will be sold, your need to use the house equity and tax issues. Life Estate deeds do still work. However, irrevocable trusts are often a better option to protect your home.

Contact Cohen & Oalican to discuss a medicaid plan that works for you.